Bull Market Charges Into 6th Year

August 9, 1987|By Suzy Hagstrom of The Sentinel Staff

When Susan Cheshire joined an investment club in Melbourne five years ago to buy stocks, little did she know how good her timing was. In fact, she did not particularly believe in timing, a common strategy for buying and selling stocks.

Instead of predicting trends in stock prices, Cheshire adhered to her club's opinion that stocks generally outperform other investments over a period of years. That viewpoint, which served her well, got a big boost, however, from a rampaging bull market, she acknowledged.

''It has been wonderful,'' Cheshire said. ''I've been very surprised at the dramatic increases. This has been an unusually good period.''

Indeed. The Dow Jones industrial average, the most commonly cited measure of stock prices, has more than tripled during the past five years. From a low of 776.92 on Aug. 12, 1982, the Dow has risen 234 percent to its most recent record high of 2,594.23, set Thursday.

Other measures of stock prices, including the Standard & Poor's 500 and the NASDAQ Composite Index have paralleled the Dow's performance.

Whether the current bull market began in August 1982 or falls into a greater advance that began in 1974 is a matter of debate on Wall Street. Some market analysts believe that the 1982 bull stampede was cut short by a bear during the first seven months of 1984, when stock prices declined about 16 percent, and that a new bull emerged in July 1984.

Whatever their school of thought, market analysts agree that the rise in stock prices has been spectacular.

Decreases in inflation and interest rates have fueled the market's gain since 1982. More recently, foreign purchases of U.S. stocks, a high level of cash available for investing and improved corporate profits have kept the bull charging.

''The market has shown outstanding performance in a short period of time,'' said Mary Farrell, market analyst for PaineWebber Inc., a major brokerage based in New York. ''It has been a strong market.''

This year alone, the Dow has passed six centennial marks. Market analysts and stockbrokers nationwide uncorked champagne at the 2,000 level in January. The average that month established its hottest streak ever, posting 13 consecutive increases.

The Dow has set 48 record highs so far this year compared with 29 for all of 1986 and 36 for 1985. Such stellar performance has occurred despite news of insider-trading scandals and wild price swings caused by institutional investors buying large blocks of stocks by computer.

Although stock-price declines or temporary bear markets could interrupt the current advance, there is no stopping the overall upward trend, according to market analysts.

''The Dow is on its way up to 3,000 over the next year or two, and I think we have a very good chance of seeing 5,000 in the Dow by the year 2000,'' said Robert Stovall, president of Stovall/Twenty-First Advisers Inc., an investment company in New York.

''The market spends most of its time either not doing anything or going up,'' said Stovall, who has identified 12 bear periods since the crash of 1929. ''The market tends to double every 15 to 18 years.''

The reasons for stock prices to continue soaring are changing, Stovall and other market analysts say.

Inflation's plunge from 12.4 percent in 1980 to 1.1 percent last year was the main force behind the surge in stock prices during the past five years, said Richard McCabe, manager of market analysis for the nation's largest brokerage, Merrill Lynch, Pierce, Fenner & Smith Inc. in New York.

A dramatic fall in interest rates coincided, he said. As measured by the prime, the rate banks charge

their best business customers, interest rates fell from 21.5 percent in 1980 to 7.5 percent last year.

Americans converted their portfolios, McCabe explained, from real estate, precious metals and other investments benefiting from the high inflation and interest rates of the late 1970s to stocks and bonds,which thrived on this decade's declining rates.

Now, with inflation having inched up to an annual rate of 5.4 percent and interest rates already having hit a low, stock prices are climbing for other reasons, McCabe and his colleagues say.

Anthony Tabell, managing partner of Delafield, Harvey, Tabell Inc., an investment company in Princeton, N.J., said, ''Most forecasters are underestimating the economic recovery. That may be the most plausible explanation for the market to go up. The economy is doing better than expected.''

Farrell of PaineWebber said that improved corporate profits are helping sustain high stock prices now.

Investors finally recognize that U.S. companies have become leaner and meaner since adopting policies in the late 1970s to fight inflation, she said. Because profit gains now are driven by efficient operations and cost controls rather than by inflation, she said, ''the level of real earnings is greater than the numbers suggest.''